Chapter 10

Usually, large-block shareholders are considered to be those shareholders with at least ____ percent of the firm's stock. a. 5 b. 25 c. 50 d. 75

a. 5

Which of the following is TRUE of trends in Japan's corporate governance structure? a. Compensation of CEOs in both private and public companies is being tied more closely to observable performance goals. b. Increased regulation in the financial sector has increased the cost of mounting hostile takeovers. c. Banks' influence over corporations is increasing. d. The gap in compensation between CEOs in public and private companies is increasing.

a. Compensation of CEOs in both private and public companies is being tied more closely to observable performance goals.

Ambrose Bierce, the CEO of DictionAry, has been paid a lump sum amounting to three years' salary because DictionAry has been bought in a hostile takeover by its main competitor. Ambrose received a. a golden parachute. b. a poison pill. c. greenmail. d. a silver handshake.

a. a golden parachute.

Broadly, the Dodd-Frank Wall Street Reform and Consumer Protection Act seeks to a. align financial institutions' actions with society's interests. b. increase the number of foreign firms listing on US stock exchanges. c. require CEOs to attest to the accuracy of their companies' financial reports. d. increase consumer protection in pharmaceutical products.

a. align financial institutions' actions with society's interests.

The repurchase at a premium of the target firm's shares that were acquired by the aggressor firm in a hostile takeover in exchange for an agreement that the aggressor will no longer target the company for takeover is called a. greenmail. b. a standstill agreement. c. crossing the palm with silver. d. a poison pill.

a. greenmail.

A virtually exclusive reliance on financial controls may occur when outsider-dominated boards exist. This may lead to all of the following EXCEPT a. high executive turnover. b. increased diversification of the firm. c. excessive management compensation. d. reduction in R&D expenditure.

a. high executive turnover.

The top management team at Sierra Infusion is concerned about the declining performance of firms in their industry. The team members are becoming concerned about the security of their jobs at Sierra Infusion. At a meeting over dinner, the top management team agrees to go to the board of directors with a proposal for a. increased diversification of Sierra Infusion. b. the addition of outside directors to the board. c. increased shareholder participation in decision making. d. greater concentration on Sierra's core industry.

a. increased diversification of Sierra Infusion.

The board of directors of CyberScope, Inc., is designing a stock option plan for its CEO that will motivate the CEO to increase the market value of the firm. Consequently, the board is a. setting the option strike price substantially higher than the current stock price. b. insuring that the strike price value of the options can be lowered if the organizational environment becomes more risky. c. having the stock option plan designed by insiders on the board of directors who are familiar with day-to-day operations of the firm. d. consulting accounting advisors to make sure that the plan transfers wealth to the CEO without immediately appearing on the balance sheet of CyberScope.

a. setting the option strike price substantially higher than the current stock price.

As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions a. increases. b. decreases. c. remains constant. d. is eliminated.

b. decreases.

Corporate governance is important to nations because a. shareholders want large stock returns. b. firms seek to invest in nations with national governance standards that are acceptable to them. c. company boards have lobbied for strong governance. d. The United States requires that other nations adopt its governance practices.

b. firms seek to invest in nations with national governance standards that are acceptable to them.

Managers may decide to invest ____ in products that are not associated with the firm's current lines of business to increase the firm's level of diversification and decrease their employment risk. a. unsubstantial profits b. free cash flows c. marginal profits d. frozen assets

b. free cash flows

The market for corporate control may not be as efficient as previously thought as recent findings suggest that those firms targeted for takeover by active corporate raiders are a. usually on the verge of bankruptcy. b. typically under-performing their industry. c. often performing above their industry averages. d. always outperforming their industry.

c. often performing above their industry averages.

Agency costs reflect all of the following EXCEPT ____ costs. a. monitoring b. enforcement c. opportunity d. incentive

c. opportunity

If the market for corporate control were efficient as a governance device, then only ____ would be targets for takeovers. a. firms with unethical top executives b. firms earning above-average returns c. poorly-performing firms d. over-valued firms

c. poorly-performing firms

Research suggests that the activism of institutional investors such as TIAA-CREF and CalPERS a. increases shareholder value significantly. b. may not have a direct effect on firm performance. c. is so aggressive that boards of directors have become overly cautious. d. has weakened the effect of other governance mechanisms.

b. may not have a direct effect on firm performance.

In contrast to managers' desires, shareholders usually prefer that free cash flows be a. used to diversify the firm. b. returned to them as dividends. c. used to reduce corporate debt. d. re-invested in additional corporate assets.

b. returned to them as dividends.

Compared to managers, shareholders prefer a. safer strategies with greater diversification for the firm. b. riskier strategies with more focused diversification for the firm. c. safer strategies with more focused diversification for the firm. d. riskier strategies with greater diversification for the firm.

b. riskier strategies with more focused diversification for the firm.

The longer the focus of managerial incentive compensation, the greater the ____ top-level managers. a. earnings potential for b. risks borne by c. incentives for d. potential tax burden for

b. risks borne by

Corporate governance revolves around the relationship between which two parties? a. shareholders and the board of directors. b. shareholders and managers. c. the board of directors and managers. d. none of the these.

b. shareholders and managers.

Historically, ____ have been at the center of German corporate governance structure. a. banks b. institutional shareholders c. public pension funds d. government agencies

a. banks

An agency relationship exists when one party delegates a. decision making responsibility to a second party. b. financial responsibility to employees. c. strategy implementation actions to functional managers. d. ownership of a company to a second party.

a. decision making responsibility to a second party.

In Japan, the principal source of the active monitoring of large companies comes from a. boards of directors. b. stock brokerage companies. c. the government. d. banks.

d. banks.

Boards of directors are now becoming more involved in a. the strategic decision making process. b. selecting new CEOs. c. the firm's tax issues. d. governmental relations.

a. the strategic decision making process.

Corporate governance is all of the following EXCEPT a. Mechanisms used to determine and control the strategic direction and performance of organizations. b. A means to establish and maintain harmony between owners and top managers whose interests may conflict. c. Ensuring that top managers' interests are aligned with the interests of stockholders. d. Resolve conflicts among corporate employees.

b. A means to establish and maintain harmony between owners and top managers whose interests may conflict.

The board of directors of CamCell, Inc., wishes to design a CEO compensation plan that will align the personal interests of the CEO with the interests of the shareholders in long-term firm performance. The board wishes the CEO to take more short-term risks in order to achieve potentially higher long-term returns. Consequently, the board has decided on an incentive plan that involves payout based on the firm's performance five years in the future. CamCell is presently searching for a new CEO. Which of the following statements is true? a. This plan will be very attractive in luring candidates for the CEO position. b. CamCell may have to over-compensate its CEO in order to offset the personal risk a CEO would undertake under this plan. c. Institutional investors disapprove of long-term executive incentive plans and they may sell their blocks of stock in CamCell. d. This type of plan is likely to cause the CEO to underinvest in R&D in order to boost CamCell's long-term profitability.

b. CamCell may have to over-compensate its CEO in order to offset the personal risk a CEO would undertake under this plan.

____ is an important influence in Japanese corporate governance structures. a. Innovation b. Consensus c. Competition d. Individualism

b. Consensus

Amos Ball, Inc., is a printing company in Iowa that has been family owned and managed for three generations. Which of the following statements is most likely to be TRUE? a. Agency costs at Amos Ball are high. b. If research findings are valid, Amos Ball, Inc., will perform better if a family member is CEO than if an outsider is CEO. c. At Amos Ball, the opportunity for managerial opportunism is high. d. The functions of risk-bearing and decision-making are separate at Amos Ball.

b. If research findings are valid, Amos Ball, Inc., will perform better if a family member is CEO than if an outsider is CEO.

Simon Leagreet, the Chairperson and CEO of L-EVA Industries, Inc., has long been the major power at L-EVA. A majority of the directors are concerned that while Mr. Leagreet has been responsible for the firm's earning above-average returns, he has been displaying a tendency toward personal extravagance at the firm's expense. In order to limit Mr. Leagreet's power, the board of directors plans to a. elect an insider as the lead director. b. appoint another individual as chairperson of the board of directors. c. require Mr. Leagreet to personally certify the firm's financial reports. d. reduce the size of the stock option package provided to Mr. Leagreet.

b. appoint another individual as chairperson of the board of directors.

James Abercrombie has a thriving consulting firm specializing in training boards of directors in decision-making skills. Mr. Abercrombie has had striking success in reducing conflict and hostility among directors and allowing boards to develop more cohesiveness. Mr. Abercrombie is considering expanding his consulting practice overseas. Which of the following statements is most likely to be TRUE? a. Mr. Abercrombie will have a large market in Japan because the culture highly values consensus decision making. b. Japanese firms will have little interest in Mr. Abercrombie's specialty because these skills are already practiced at a high level. c. German firms will not be interested in Mr. Abercrombie's services because the German system of decision-making is based on authority and few conflicts emerge. d. Mr. Abercrombie should find significant need for his services in companies in transitional economies.

b. Japanese firms will have little interest in Mr. Abercrombie's specialty because these skills are already practiced at a high level.

Which of the following statements is about corporate governance in Germany is FALSE? a. The Vorstand (management board) of a German corporation makes decisions about strategy and management. b. The Vorstand is elected by the firm's employees. c. Employees, union members, and shareholders appoint members to the Aufsichsrat (the supervisory tier of the board). d. Large institutional investors such as pension funds, and insurance companies are relatively insignificant owners of corporate stock.

b. The Vorstand is elected by the firm's employees.

What is the main lesson learned from investor Carl Icahn's bid to purchase Clorox Co.? a. Boards will only defend against takeover attempts if their companies are performing poorly. b. The situation demonstrates two possibilities. First, Clorox was underperforming and the market for corporate control disciplined managers to improve performance. The second possibility was that investors sometimes take over companies that are performing well. c. Boards commonly make mistakes in rejecting takeover bids as shown in the case of Icahn's bid for Clorox Co. d. Clorox was clearly underperforming and Icahn's bid was a good example of the efficiency of the market for corporate control.

b. The situation demonstrates two possibilities. First, Clorox was underperforming and the market for corporate control disciplined managers to improve performance. The second possibility was that investors sometimes take over companies that are performing well.

The CEO of Skyco, a publicly-traded company that has been earning below-average returns, has been publicly criticized by shareholders for persuading the board of directors to give her interest-free loans, for having the company purchase and furnish a lavish apartment in Paris for her personal use on her twice-yearly trips there, and for excessive stock options. The CEO's behavior may be indication of a. reasonably compensating a CEO. b. a weak board of directors. c. the laxity of institutional investors. d. the difference in risk propensity between owners and managers.

b. a weak board of directors.

According to the Chapter 10 Opening Case, Apple's _______ recently used that firm's succession plan to appoint Tim Cook CEO following Steve Job's resignation. a. stockholders b. board of directors c. employees d. CEO

b. board of directors

The New York Stock Exchange requires that the audit committee be a. available to comment to external analysts. b. headed by outside directors. c. liable for any illegal actions by the top management team. d. made up of CPAs with auditing experience.

b. headed by outside directors.

Managers in the U.S. receive ____ compensation than managers in the rest of the world. a. equivalent b. higher c. lower d. more variable

b. higher

Generally, a board member who is a source of information about a firm's day-to-day activities is classified as a(an) ____ director. a. lead independent b. inside c. related d. encumbered

b. inside

The market for corporate control serves as a means of governance when a. the firm is overpriced in the market. b. internal controls have failed. c. the corporation has greatly exceeded performance expectations. d. the top management team's interests and the owners' interests are aligned.

b. internal controls have failed.

In the U.S., the fundamental goal of business is to a. ensure customer satisfaction. b. maximize shareholder wealth. c. provide job security. d. generate profits.

b. maximize shareholder wealth.

International Food Services (IFS) has a contract with the Marines to supply meals for its troops in Afghanistan and other foreign assignments. As a means of increasing profits, IFS has used substandard ingredients in these meals and has consistently lied about this practice during quality investigations by the Marines. Who is ultimately responsible for the corporate climate that resulted in this wrongdoing? a. the director of food service for IFS b. the board of directors of IFS c. the employees directly involved in the wrongdoing d. the head of contract services for the Marines

b. the board of directors of IFS

Ownership concentration is determined by both a. the number of stockholders and the parties they represent. b. the number of stockholders and total percentage of shares they own. c. the number of outside directors and the parties they represent. d. the number of outside directors and total percentage of shares they own.

b. the number of stockholders and total percentage of shares they own.

All of the following are correct about the Chapter 10 Strategic Focus about Rio Tinto EXCEPT: a. The firm's size and complexity have increased the difficulty of achieving effective corporate governance. b. Large-block stockholders exerted influence on both strategic and operating decisions at the company. c. Rio Tinto recognized by large-block shareholders for its effective use of CEO pay as a corporate governance mechanism. d. Rio Tinto has been criticized for having poor governance because it has given executives generous rewards for hitting unchallenging targets.

c. Rio Tinto recognized by large-block shareholders for its effective use of CEO pay as a corporate governance mechanism.

Several members of the board of directors of American Textile Products (ATP) have proposed creating the position of lead director. What circumstances would most likely have initiated this proposal? a. ATP has been the initiator of several hostile takeovers in the last two years. b. The board has been successful in reducing the percentage of CEO pay that is composed of stock options. c. The CEO/Chairperson of the board has been suspected of opportunistic behavior. d. The firm is traded on the New York Stock Exchange and must change its corporate governance to comply with the NYSE's new rules.

c. The CEO/Chairperson of the board has been suspected of opportunistic behavior.

In the Chapter 10 Strategic Focus, all of the following are issues in executive compensation EXCEPT: a. Many CEOs are rewarded for short-term rather than long-term performance. b. CEO pay is frequently not tied to performance. c. The Dodd-Frank Act stipulates that stockholders have no say in the compensation packages of top executives. d. When using stock options as part of executive compensation, it is recommended that those options cannot be exercised for five years to avoid opportunistic behavior by executives.

c. The Dodd-Frank Act stipulates that stockholders have no say in the compensation packages of top executives.

Which of the following is FALSE about corporate governance in China? a. The Chinese governance system may be tilting towards the Western model. b. With increasing frequency, the compensation of top executives of Chinese companies is closely related to prior and current financial performance of the firm. c. The state still uses direct and/or indirect controls to influence the strategies employed by most firms. d. Firms with higher state ownership tend to have lower market value and more volatility in those values over time.

c. The state still uses direct and/or indirect controls to influence the strategies employed by most firms.

The separation between firm ownership and management creates a(n) ____ relationship. a. governance b. control c. agency d. dependent

c. agency

All of the following are consequences of the Sarbanes-Oxley Act EXCEPT a. a decrease in foreign firms listing on U.S. stock exchanges. b. internal auditing scrutiny has improved and there is greater trust in financial reporting. c. an increased number of IPOs (initial public offerings) are expected. d. Section 404 creates excessive costs for firms.

c. an increased number of IPOs (initial public offerings) are expected.

Given the demands for greater accountability and improved performance, which of the following is NOT a voluntary change many boards of directors have initiated? a. moving toward having directors from different backgrounds b. strengthening the internal management and accounting control systems c. compensating directors with stock options rather than with fixed remuneration d. establishing and using formal processes to evaluate the board's performance

c. compensating directors with stock options rather than with fixed remuneration

Institutional owners are a. shareholders in the large institutional firms listed on the New York Stock Exchange. b. banks and other lending institutions that have provided major financing to the firm. c. financial institutions such as mutual funds and pension funds that control large-block shareholder positions. d. prevented by the Sarbanes-Oxley Act from owning more than 50% of the stock of any one firm.

c. financial institutions such as mutual funds and pension funds that control large-block shareholder positions.

Complete the following: In small firms, managers often own a ____ percentage of the firm, which means there is ____ separation between ownership and managerial control. a. small; small b. small; large c. large; small d. large; large

c. large; small

Managerial employment risk is the a. risk that managers will behave opportunistically. b. risk undertaken by managers to earn stock options. c. managers' risk of job loss, loss of compensation, and/or loss of reputation. d. risk managers will not find a new top management position if they should be dismissed.

c. managers' risk of job loss, loss of compensation, and/or loss of reputation.

German executives are not dedicated to the maximization of shareholder value to the degree that is the case for executives in the UK and U.S largely because a. the roles of CEO and chairperson of the board of directors are usually combined. b. large institutional investors control large blocks of stock. c. private shareholders and large institutional investors rarely have large ownership positions in firms. d. of the focus on stewardship-management in German firms rather than the financial performance focus of U.S. firms.

c. private shareholders and large institutional investors rarely have large ownership positions in firms.

One means that is considered to improve the effectiveness of outside directors is a. mandating that all outside directors be drawn from government or academia rather than industry. b. requiring that outside directors be former executives of the firm. c. requiring outside directors to own significant equity stakes in the firm. d. requiring that outside directors be truly objective by having no ownership interest in the firm.

c. requiring outside directors to own significant equity stakes in the firm.

In the U.S., a firm's key stakeholder(s) is(are) the a. government. b. executives. c. shareholders. d. customers.

c. shareholders.

The CEO and Chairman of the board of directors Alta Corp. is dismayed by a lack of effort and insights his directors provide during board meetings. The directors are all outsiders, experienced, and run their own successful firms. The CEO/Chair genuinely seeks their greater involvement. What would you recommend? a. Requiring that the directors own stock in the company. b. Establish a formal process to evaluate the board's performance. c. Electing an lead director. d. All of these choices would increase involvement.

d. All of these choices would increase involvement.

Which of the following is a FALSE statement about corporate governance? a. Governance is used to establish order between parties whose interests may be in conflict. b. Corporate governance mechanisms sometimes fail to monitor and control top managers' decisions. c. Corporate governance mechanisms can be in conflict with one another. d. Corporate governance is best achieved with a board of directors with strong ties to management.

d. Corporate governance is best achieved with a board of directors with strong ties to management.

Agricultural Chemicals, Inc., was the target of a hostile takeover six months ago. The CEO and the top executives successfully fended off the takeover and are concentrating on strategies to improve the performance of the firm. Which of the following is most likely to be TRUE? a. Hostile takeover attempts are so common that they do not reflect negatively on the firm's performance. They are more a function of general market conditions. b. The fact that a hostile takeover has occurred is proof that the firm was under-performing. c. Research shows that once a hostile takeover has been defeated, the firm is safe from other hostile takeover attempts for many years. d. The CEO and top executives should not consider their jobs secure.

d. The CEO and top executives should not consider their jobs secure.

Which of the following reasons would NOT explain the difficulty of determining appropriate executive compensation? a. The decisions made by top-level managers are typically complex and nonroutine. b. An executive's decisions often affect firm performance only over the long run. c. A number of factors intervene between top-level management decisions and firm performance (e.g., unpredictable economic, social, or legal changes). d. The compensation committee may not have comprehensive firm performance data.

d. The compensation committee may not have comprehensive firm performance data.

The ownership of major blocks of stock by institutional investors have resulted in all of the following EXCEPT a. making CEOs more accountable for their performance b. challenges to the decisions of boards c. focusing attention on ineffective boards of directors d. a direct effect on firm performance

d. a direct effect on firm performance

A hostile takeover defense wherein the target firm makes its stock less attractive to a potential acquirer is called a. greenmail. b. a standstill agreement. c. crossing the palm with silver. d. a poison pill.

d. a poison pill.

Japanese keiretsu are a. management structures related to total quality management systems. b. company unions, which are a type of governance system. c. the banks owing the largest shares of stock in the firm. d. a system of cross-shareholding among firms.

d. a system of cross-shareholding among firms.

The interests of multinational corporations' shareholders may be best served when there is a. a uniform compensation plan for all corporate executives, U.S. and foreign alike. b. executive compensation that is primarily based on long-term performance. c. elevation of foreign executive compensation to U.S. levels. d. a variety of compensation plans for executives of foreign subsidiaries.

d. a variety of compensation plans for executives of foreign subsidiaries.

All of the following statements are TRUE about the use of defense tactics by the target firm during a hostile takeover EXCEPT a. defense tactics are usually beneficial for the executives of the target firm. b. defense tactics are opposed by institutional investors. c. defense tactics vary in their effectiveness as a defense to takeovers. d. defense tactics make the costs of a takeover lower.

d. defense tactics make the costs of a takeover lower.

According to the Chapter 10 Opening Case, all of the following would aspects of corporate governance EXCEPT a. creating value for shareholders b. developing a succession plans for CEOs c. signaling to the global community that a nation's business infrastructure is consistent with global standards d. maximization of CEO compensation

d. maximization of CEO compensation

Research suggests that boards of directors perform better if a. the CEO is also the chairperson of the board of directors. b. the board includes employees as voting members. c. the board is homogenous in composition. d. outside directors own significant equity in the organization.

d. outside directors own significant equity in the organization.

Executive compensation is a governance mechanism that seeks to align managers' and owners' interests through all of the following EXCEPT a. bonuses. b. long-term incentives such as stock options. c. salary. d. penalties for inadequate firm performance.

d. penalties for inadequate firm performance.

A major conflict of interest between top executives and owners, is that top executives wish to diversify the firm in order to ____, while owners wish to diversify the firm to ____. a. generate free cash flows, reduce the risk of total firm failure b. increase the price of the firm's stock, increase the dividends paid out from free cash flows c. reduce the risk of total firm failure, reduce their total portfolio risk d. reduce their employment risk, increase the company's value

d. reduce their employment risk, increase the company's value

All of the following are areas covered by the Dodd-Frank Wall Street Reform and Consumer Protection Act EXCEPT a. consumer protection b. CEO compensation c. regulation of derivatives d. retirement accounts

d. retirement accounts

Monitoring by shareholders is usually accomplished through a. management consultants. b. government auditors. c. the firm's top managers. d. the board of directors.

d. the board of directors.

The governance mechanism most closely connected with deterring unethical behaviors by holding top management accountable for the corporate culture is a. ownership concentration. b. the market for corporate control. c. executive compensation systems. d. the board of directors.

d. the board of directors.

Which of the following is NOT an internal governance mechanism? a. the board of directors b. ownership concentration c. executive compensation d. the market for corporate control

d. the market for corporate control

Product diversification provides two benefits to managers that do not accrue to shareholders: ____ and ____. a. greater experience in a wider range of industries, lessening of managerial employment risk b. the manager frequently invests in the acquired firm which allows him or her extensive profits, the manager can frequently buy excess assets divested by the acquired firm c. the manager's supervisory needs are lowered, the manager is allowed greater time to oversee a wider range of activities d. the opportunity for higher compensation through firm growth, a reduction in managerial employment risk

d. the opportunity for higher compensation through firm growth, a reduction in managerial employment risk